DISCUSSION WHITEPAPER
Fraud Detection
Using Data Analytics
in the Banking Industry
DISCUSSION PAPER
Table of Contents
WHAT IS FRAUD?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
WHO IS RESPONSIBLE FOR FRAUD DETECTION?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
WHY USE DATA ANALYSIS FOR FRAUD DETECTION?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ANALYTICAL TECHNIQUES FOR FRAUD DETECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FRAUD DETECTION PROGRAM STRATEGIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
BANKING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
BANKING RELATED FRAUD SCHEMES: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Check Tampering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Skimming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Larceny . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
6
6
6
7
7
7
OTHER RESOURCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ABOUT ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2
DISCUSSION PAPER
Fraud Detection Using Data
Analytics in the Banking Industry
What is Fraud?
Fraud encompasses a wide range of illicit practices and illegal acts involving
intentional deception or misrepresentation. The Institute of Internal Auditors’
International Professional Practices Framework (IPPF) defines fraud as:
“… any illegal act characterized by deceit, concealment, or violation of trust.
These acts are not dependent upon the threat of violence or physical force.
Frauds are perpetrated by parties and organizations to obtain money, property,
or services; to avoid payment or loss of services; or to secure personal or
business advantage.”
Fraud impacts organizations in several areas including financial, operational, and
psychological. While the monetary loss owing to fraud is significant, the full
impact of fraud on an organization can be staggering. The losses to reputation,
goodwill, and customer relations can be devastating. As fraud can be
perpetrated by any employee within an organization or by those from the
outside, it is important to have an effective fraud management program in place
to safeguard your organization’s assets and reputation.
Who is Responsible for Fraud Detection?
While senior management and the board are ultimately responsible for a fraud
management program, internal audit can be a key player in helping address
fraud. By providing an evaluation on the potential for the occurrence of fraud,
internal audit can show an organization how it is prepared for and is managing
these fraud risks.
In today’s automated world, many business processes depend on the use of
technology. This allows for people committing fraud to exploit weaknesses in
security, controls or oversight in business applications to perpetrate their crimes.
However, the good news is that technology can also be a means of combating
fraud. Internal audit needs to view technology as a necessary part of their toolkit
that can help prevent and detect fraud. Leveraging technology to implement
continuous fraud prevention programs helps safeguard organizations from the
risk of fraud and reduce the time it takes to uncover fraudulent activity. This
helps both catch it faster and reduce the impact it can have on organizations.
The International Professional Practices Framework (IPPF) contains
the following Standards on fraud and internal audit’s role:
1200 – Proficiency and Due Professional Care
1210-A2 – Internal auditors must have sufficient knowledge to
evaluate the risk of fraud and the manner in which it is managed
by the organization, but are not expected to have the expertise
of a person whose primary responsibility is detecting and
investigating fraud.
1220 – Due Professional Care
1220.A1 – Internal auditors must exercise due professional care
by considering the following:
■■
■■
■■
Extent of work needed to achieve the engagement’s
objectives;
Related complexity, materiality, or significance of matters to
which assurance procedures are applied;
Adequacy and effectiveness of governance, risk
management, and control processes;
■■
Probability of significant errors, fraud, or noncompliance; and
■■
Cost of assurance in relation to potential benefits.
2060 – Reporting to Senior Management and the Board
The chief audit executive must report periodically to senior
management and the board on the internal audit activity’s
purpose, authority, responsibility, and performance relative to its
plan. Reporting must also include significant risk exposures and
control issues, including fraud risks, governance issues, and other
matters needed or requested by senior management and the
board.
2120 – Risk Management
2120.A2 – The internal audit activity must evaluate the potential
for the occurrence of fraud and how the organization manages
fraud risks.
2210 – Engagement Objectives
2210.A2 – Internal auditors must consider the probability of
significant errors, fraud, noncompliance, and other exposures
when developing the engagement objectives.
3
DISCUSSION PAPER
Why Use Data Analysis for Fraud Detection?
Data analysis software enables auditors and fraud examiners to analyze an organization’s business data to
gain insight into how well internal controls are operating and to identify transactions that indicate
fraudulent activity or the heightened risk of fraud. Data analysis can be applied to just about anywhere in
an organization where electronic transactions are recorded and stored.
Data analysis also provides an effective way to be more proactive in the fight against fraud. Whistleblower
hotlines provide the means for people to report suspected fraudulent behavior but hotlines alone are not
enough. Why be only reactive and wait for a whistleblower to finally come forward? Why not seek out
indicators of fraud in the data? That way, organizations can detect indicators of fraudulent activity much
sooner and stop it before it becomes material and creates financial damage.
To effectively test for fraud, all relevant transactions must be tested across all applicable business systems
and applications. Analyzing business transactions at the source level helps auditors provide better insight
and a more complete view as to the likelihood of fraud occurring. It helps focus investigative action to
those transactions that are suspicious or illustrate control weaknesses that could be exploited by
fraudsters. Follow-on tests should be performed to further that auditor’s understanding of the data and to
search for symptoms of fraud in the data.1
There is a spectrum of analysis that can be deployed to detect fraud. It ranges from point-in-time analysis
conducted in an ad hoc context for one-off fraud investigation or exploration, through to repetitive
analysis of business processes where fraudulent activity is likely to more likely to occur. Ultimately, where
the risk of fraud is high and the likelihood is as well, organizations can employ an “always on” or
continuous approach to fraud detection – especially in those areas where preventative controls are not
possible or effective.
Once an organization gets started with data analysis, they usually find that they want to do more and dig
deeper into the data. Modern organizations have increased management demands for information and
the audit paradigm is shifting from the traditional cyclical approach to a continuous and risk-based
model. Technology therefore offers a range of solutions, varying by the size and sophistication of the
audit organization. From ad hoc analysis, through to repeatable automated procedures, and continuous
auditing and monitoring, analytics provide insight into the integrity of financial and business operations
through transactional analysis. Technology provides more accurate audit reports and better insight into
the internal controls framework, and improves the ability to access and manage business risk.
“As a large multinational organisation, our internal audit process is under scrutiny from multiple global and
local authorities. It was essential for us to find a solution which allowed fast processing of financial data, was
scalable to our needs and streamlined the entire process to increase overall efficiency. ACL met every one of our
needs.” | Cyrille Oudard, Head of Internal Audit Tools, BNP Paribas
1
Coderre, David G., Fraud Analysis Techniques Using ACL, John Wiley & Sons, 2009.
4
The Association of
Certified Fraud
Examiners’ 2010
Global Fraud Study
found that the
banking and financial
services industry had
the most cases across
all industries –
accounting for more
than 16% of frauds.
www.acfe.org
DISCUSSION PAPER
Analytical Techniques for Fraud Detection
Getting started requires an understanding of:
✔✔
The areas in which fraud can occur
✔✔
What fraudulent activity would look like in the data
✔✔
What data sources are required to test for indicators of fraud
“ACL Analytics Exchange leverages ACL’s proven analytical strengths to provide auditors with a means to
perform data analyses and help effectively detect and prevent fraud.” | David Coderre, leading author of
books such as “Computer-Aided Fraud Detection & Prevention: A Step-by-Step Guide”
The following analytical techniques are effective in detecting fraud:
■■
Calculation of statistical parameters (e.g., averages, standard deviations, high/low values) – to
identify outliers that could indicate fraud.
■■
Classification – to find patterns amongst data elements.
■■
Stratification of numbers – to identify unusual (i.e., excessively high or low) entries.
■■
■■
■■
Digital analysis using Benford’s Law – to identify unexpected occurrences of digits in naturally
occurring data sets.
Joining different diverse sources – to identify matching values (such as names, addresses, and
account numbers) where they shouldn’t exist.
Duplicate testing – to identify duplicate transactions such as payments, claims, or expense report
items.
■■
Gap testing – to identify missing values in sequential data where there should be none.
■■
Summing of numeric values – to identify control totals that may have been falsified.
■■
Validating entry dates – to identify suspicious or inappropriate times for postings or data entry.2
Please note that random sampling is not listed as an effective fraud detection technique. While sampling
is an effective data analysis technique for analyzing data values that are consistent throughout the data
population, the very nature of fraud is different as it tends not to occur randomly.
Fraud Detection Program Strategies
Instead of relying on reactive measures like whistleblowers, organizations can and should take a more
hands-on approach to fraud detection. A fraud detection and prevention program should include a
range of approaches – from point-in-time to recurring and, ultimately, continually for those areas where
the risk of fraud warrants. Based on key risk indicators, point-in-time (or ad hoc) testing will help identify
transactions to be investigated. If that testing reveals indicators of fraud, recurring testing or continuous
analysis should be considered.
A KPMG Forensics’ Fraud Risk Management report states, “unlike retrospective analyses, continuous
transaction monitoring allows an organization to identify potentially fraudulent transactions on, for
example, a daily, weekly, or monthly basis. Organizations frequently use continuous monitoring efforts to
focus on narrow bands of transactions or areas that pose particularly strong risks.”3
By leveraging the power of data analysis software, organizations can detect fraud sooner and reduce the
negative impact of significant losses owing to fraud.
2
Global Technology Audit Guide: Fraud Prevention and Detection in an Automated World. The Institute of Internal Auditors, 2009.
3
“Fraud Risk Management: Developing a Strategy for Prevention, Detection and Response.” KPMG International, 2006
5
DISCUSSION PAPER
Banking
Fraud detection in banking is a critical activity that can span a series of fraud schemes and fraudulent
activity from bank employees and customers alike. Since banking is a relatively highly regulated industry,
there are also a number of external compliance requirements that banks must adhere to in the combat
against fraudulent and criminal activity.
Banking Related Fraud Schemes:
Here are a few typical fraud schemes encountered in banking and some examples of the way data
analysis can be applied to detect and prevent them:
Corruption
■■
■■
■■
Find customers who appear on the US Treasury Department Office of Foreign Asset Control (OFAC)
list.
Ensure Financial Action Taskforce on Money Laundering (FATF) compliance.
Produce listing of transactions with organizations on the list of non-cooperative countries and
territories.
Cash
■■
■■
■■
Identify cash transactions just below regulatory reporting thresholds.
Identify a series of cash disbursements by customer number that together exceed regulatory
reporting thresholds.
Identify statistically unusual numbers of cash transfers by customer or by bank account.
Billing
■■
Identify unusually large number of waived fees by branch or by employee.
Check Tampering
■■
Identify missing, duplicate, void, or out of sequence check numbers.
■■
Identify checks paid that do not match checks issued, by bank, by check.
■■
Locate check forgery or falsification of loan applications.
Banking/Financial Services- 298 Cases
Scheme
Number of Cases
Percent of Cases
Corruption
101
33.9%
Cash on Hand
64
21.5%
Billing
37
12.4%
Check Tampering
35
11.7%
Non-Cash
33
11.1%
Skimming
32
10.7%
Larceny
29
9.7%
Expense Reimbursement
20
6.7%
Financial Statement Fraud
16
5.4%
Payroll
9
3.0%
Register Disbursements
8
2.7%
Distribution of Fraud Schemes in Banking/Financial Services4
4
6
2010 Global Fraud Study: Report to the Nations on Occupational Fraud and Abuse, Association of Certified Fraud Examiners
DISCUSSION PAPER
Skimming
■■
Highlight very short time deposit and withdrawal on the same account.
■■
Find indicators of kiting checks.
■■
Highlight duplication of credit card transactions and skimming.
Larceny
■■
Identify customer account takeover.
■■
Identify co-opted customer account information.
■■
Locate number of loans by customer or bank employee without repayments.
■■
Find loan amounts greater than the value of specified item or collateral.
■■
■■
Highlight sudden activity in dormant customer accounts – identify who is processing transactions
against these accounts.
Isolate mortgage fraud schemes – identify “straw buyer” scheme indicators.
Financial Statement Fraud
■■
Monitor dormant and suspense General Ledger accounts.
■■
Identify Journal Entries at suspicious times.
Other Resources
■■
■■
Association of Certified Fraud Examiners (ACFE): the world’s largest anti-fraud organization and
premier provider of anti-fraud training and education. www.acfe.org
The Institute of Internal Auditors (The IIA): www.theiia.org
◆◆
◆◆
◆◆
■■
International Standards for the Professional Practice of Internal Auditing (Standards): The Standards are
mandatory requirements – principle-focused and providing a framework for performing and
promoting internal auditing.
Internal Auditing and Fraud Practice Guide: guidance on how to comply with the International
Standards for the Professional Practice of Internal Auditing.
GTAG 13: Fraud Prevention and Detection Techniques in an Automated World: step-by-step process
guide for auditing a fraud prevention program, including an explanation of the various types of data
analysis to use in detecting fraud, and a technology fraud risk assessment template.
ACL Detecting Fraud resource page: anti-fraud materials including industry reports, case studies
and on-demand webinars. www.acl.com/fraud
To find out how ACL can help your organization combat fraud, contact us at +1-604-669-4225 or
[email protected] to arrange for a free consultation.
7
DISCUSSION PAPER
About ACL
ACL delivers technology solutions that are transforming audit and risk management. Through a
combination of software and expert content, ACL enables powerful internal controls that identify and
mitigate risk, protect profits, and accelerate performance.
Driven by a desire to expand the horizons of audit and risk management so they can deliver greater
strategic business value, we develop and advocate technology that strengthens results, simplifies
adoption, and improves usability. ACL’s integrated family of products—including our cloud-based
governance, risk management and compliance (GRC) solution and flagship data analytics products—
combine all vital components of audit and risk, and are used seamlessly at all levels of the organization,
from the C-suite to front line audit and risk professionals and the business managers they interface with.
Enhanced reporting and dashboards provide transparency and business context that allows
organizations to focus on what matters.
And, thanks to 25 years of experience and our consultative approach, we ensure fast, effective
implementation, so customers realize concrete business results fast at low risk. Our actively engaged
community of more than 14,000 customers around the globe—including 89% of the Fortune 500—tells
our story best. Here are just a few.
Visit us online at www.acl.com
8
130165-DP_Fraud_detection_BANKING
© 2014 ACL Services Ltd.
ACL and the ACL logo are trademarks or registered trademarks of ACL Services Ltd. All other trademarks are the property of their respective owners.